Cliff diving

An interesting thing has happened with regard to the looming fiscal cliff since the Nov. 6 presidential election results. You hear Democratic pundits downplay its importance and suggest it may not be such a bad thing and you hear those on the other side talk more about its importance.

One right leaning commentator actually complained about the rigid stance by Senate leader Harry Reid on taxes. We wouldn’t want any rigid position on taxes would we, Mr. Norquist?

Let’s talk about what the fiscal cliff is. Basically all the Bush era tax cuts and President Obama’s middle class payroll tax cut expire at the end of the year. In addition to that automatic spending cuts, sequestration, that were put in place when Congress and the Administration couldn’t agree on what to cut during the 2011 debt limit debate will hit at the same time.

The mountain of money that this double whammy will remove from the economy would slice several points of growth from GDP and lead to a recession according to the Congressional Budget Office, Federal Reserve and just about any economist you ask. It is scary when economists agree.

But what to do? This, after all, is really the responsible thing to do; even if we arrived at it in an irresponsible manner.

Basically what happened is like two friends deciding to run a marathon but unable to agree on a training strategy, they decide not to train at all but promise that in six months’ time they will run the marathon. Not a recipe for success.

The Simpson Bowles Commission and before that a comprehensive study sponsored by the MacArthur foundation both highlighted the importance of addressing the debt issue and both also noted it will be necessary to address this on the revenue side and spending side. Bottom line, spending cuts or increased taxes cannot get us where we need to go, we have to do both. Actually, we need to do both in a responsible manner so that the economy can grow more robustly as we need all three: increased revenues, spending cuts and solid growth.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures magazine in 2001, before the name change to Modern Trader, and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.